Microsoft Beats the Street, But Windows 7 Is Its Bet Going Forward

Microsoft’s (s msft) week of positive news continued this morning as the company turned in earnings and revenues that beat analysts’ expectations, but it remains clear that the company’s prospects going forward will depend heavily on the reception of its Windows 7 operating system. Sales in the company’s fiscal first quarter fell 14 percent to $12.9 billion, down for the third quarter in a row, and earnings fell 18 percent to $3.6 billion. The Redmond giant has been battling razor-thin profit margins in the portable computing arena, though, and its results today were expected to be worse. Meanwhile, there are signs that the PC market may be improving, and Microsoft is indeed riding a positive tide surrounding Windows 7.

Microsoft’s Windows sales were actually down 39 percent for the quarter as the company’s Windows Vista business stalled while it gave out upgrade coupons for Windows 7. Earlier this year, Microsoft announced its first-ever layoffs, which it attributed to a profit margin decline caused by netbooks. As it noted in its 10-Q earlier this year:

“The decline in OEM revenue reflects an 11 percentage point decrease in the OEM premium mix to 64 percent, primarily driven by growth of licenses related to sales of netbook PCs, as well as changes in the geographic and product mixes.”

Microsoft’s challenges when it comes to trying to make money in the portable computing market won’t go away anytime soon, but there are signs that cost-cutting at the company is working. And a very positive quarterly earnings report from Intel (s intc) may also imply that better times lie ahead in the PC market. Above all, though, Microsoft’s fortunes are likely to improve because of the positive reaction to Windows 7. It has already set records for pre-orders, and has more momentum than any Microsoft operating system in years.